Ten Keys For Doing Business In China. A New List.

Okay, no sooner do I tout a list of ten keys for doing business in China but a loyal reader sends me another such list by which he swears. This list was created by Michael Witt, an INSEAD Professor of Asian Business and it makes up a Forbes article, entitled, The Ten Principles For Doing Business In China. It is described as “ten insights intended to help your business be successful in its China operations” and it too contains excellent pointers for foreign companies doing business in China.

Here is that list with my comments in italics:

1. Do your homework. When China operations get into trouble, a lack of preparation is a common theme. Very true. I hate to say this, but in my experience, foreign companies that get in trouble in China are usually at fault for not having better prepared.

2. Beware of industrial dynamics. A common cause of losses in China is that foreign firms are so focused on market growth rates that they neglect the basics of competitive analysis. In the beer industry, for instance, more than 20 foreign brewers entered in the mid-1990s, each of them planning to capture on average 15 percent of their market segment. In a market lacking clear differentiation, they also found themselves competing with around 600 local brewers, many of them subsidised by local governments. Some expected these issues to disappear over time, but almost twenty years later, the fundamental situation has changed little. Many industries in China resemble the beer industry, with overcapacity, high levels of fragmentation, subsidised local competition, and foreigners willing to absorb losses from their “strategic” investments. Agreed. This also fits into the overall need to prepare.

3. Take your time. Many companies want to get on the ground quickly. In one case, the CEO told his head of strategy to get China operations going within six months. Time pressure of this sort can create problems later on. It tends to result in sloppy planning and analysis. It shifts the attention from finding the right partner to finding any partner, regardless of partner fit. Moreover, it weakens your hand in negotiations. Your Chinese counterpart will know how to use your time constraints against you, and you will walk away with a worse deal. Completely agree. In my experience, there is a direct correlation between speed and quantity of mistakes. Again though, this fits into the overall need to prepare.

4. Chinese society is collectivist. Chinese society is collectivist in that individuals identify with an “in-group” consisting of family, clan, and friends. Within this, cooperation is the norm. Outside it, zero-sum competition is common. Zero-sum competition means that your Chinese counterpart may not believe in win-win solutions. One can observe this, for instance, in the tendency to re-open negotiations just as everything seems settled, especially if one seemed too ready to agree with the negotiated terms; one’s counterpart may interpret this as an indication that s/he has not bargained hard enough. Absolutely true, and foreign companies that ignore this do so at their peril. For more on negotiating with Chinese companies, check out How To Handle Chinese Negotiating Tactics, How To Handle Chinese Negotiating Tactics. Part Two, How To Handle Chinese Negotiating Tactics. Part Three.

5. Mistrust and opportunism are endemic. There are two opposite ways of extending trust. One is to trust until given reason not to; the other is not to trust until there is enough evidence of trustworthiness. China takes the latter approach. The zero-sum competition already noted creates an incentive to take advantage of people outside the in-group. As a consequence, the Chinese tend not to trust people outside their in-group. Take your cue from them. Completely agree. Foreign companies doing business in China should not be afraid to show a lack of trust. For more on the need for conducting due diligence in China and how to conduct due diligence in China, check out the following:

6. Trust is interpersonal and takes time to build. A common safeguard against opportunism is to build relationships of trust with persons who matter for your business. Unlike in the West, the creation of personal friendship is a prerequisite of doing business. Building friendship takes time, which is another reason to avoid rushing into things. Besides numerous invitations to sports and other events, one key element in building trust is long dinners during which everything but business is discussed. In these, alcohol plays an important role. Learn to drink intelligently. Seasoned negotiators dispose of the alcohol into their water glasses or into the wet towels most good restaurants make available. This is true, but plenty of business with China gets done these days without these sorts of personal relationships.

7. Notions of “out-of-bounds” behaviour do not necessarily match. Chinese negotiators occasionally push beyond what their Western counterparts consider appropriate bounds. For example, the representatives of a large Western firm were negotiating the distribution rights for one of their products. Their Chinese counterparts closed their initial pitch by threatening to use their political connections to prevent distribution of their products if they did not receive the rights. In another case, the Chinese party got their Western guests drunk to prevent them from being effective in negotiations the following morning (which, on the Chinese side, involved a completely different set of people). These sort of things do sometimes happen but smart companies generally have little problem in dealing with them.

8. Chinese society is hierarchical. Company decisions are typically reached in a top-down manner, with only the very top of the pyramid involved in decision-making. Mistrust puts limits on delegation, and supervisory control at each level is high. Be aware in negotiations that the decision is ultimately made at the very top. If your counterpart is not part of that group, s/he is typically not authorised to make major decisions but must report back to the top for instructions. Completely true.

9. Government in China is decentralised and in important respects, bottom-up. Conventional wisdom holds that China’s governmental structure is highly centralised, with all key decisions made in Beijing. In reality, Beijing directs little of what happens throughout the country, especially in far-flung regions. To be sure, if Beijing truly wants something to happen, it will. Expect conditions to vary by location. In addition, to the extent you need to negotiate with government, it is crucial to involve the local government. Even if you have agreement from Beijing, if the local government wants to thwart you, it will. Generally, you want to be sure that both the applicable local government and Beijing are okay with your China business plans.

10. Be conscious of the large picture. Most of the growth in China since 1978 has come from private small and medium-sized enterprises. Today, they make up about 65 percent of Chinese GDP. If so, fierce competitive battles seem likely for the future, and easy access to state money for these firms means the playing field will not be level. Government may be on your side as long as your technology is needed. Keep this in mind when selecting a partner for cooperation or considering market entry. Sure.

I think the above list is highly accurate, but as far as being helpful for conducting business in China, I prefer Hupert’s. What do you think?

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

About China Law Blog

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.